Hold the front page: Greece 'admits' deficit woes

Apparently, Greece might miss its deficit reduction targets. Why weren't we told?

by Emma Haslett
Last Updated: 10 Oct 2011
Expect another car crash on the markets today, after Greece made its latest admission: apparently, the chances of its meeting deficit reduction targets are currently about as likely as a Demis Roussos revival. Its 2011 deficit is now projected to be 8.5% of GDP, rather than the 7.6% target set by the EU and International Monetary Fund, and next year’s projection looks just as bad, at 6.8% of GDP, rather than 6.5%. This has all had a rather unfortunate effect on Europe’s willingness to bail it out again – which has hit shares (particularly banking ones) with all the impact of a hurled plate, as exemplified by the FTSE 100, which dipped below 5,000 – again.

Finance ministers were due to meet on October 13 to sign off the next tranche of bailout money, which Greece had originally said it needed by mid-October, or it wouldn’t be able to pay wages. Thanks to its little announcement, though, that meeting has now been cancelled – which quite possibly means the country won’t get its next loan until November. Jean-Claude Juncker, the chairman of a meeting of finance ministers in Luxembourg, was quick to reassure that it would be fine until then. Although he also ruled out the possibility of a default by Greece, which is widely accepted to be inevitable. So Juncker might be living in his own world…

Default or not, though, what’s essential (in the eyes of the EU ‘Troika’ – the holy trinity of the IMF, the EU and the European Central Bank) is that Greece now sticks to drastic new austerity measures, which it introduced on Sunday. That includes consigning 30,000 civil servants to ‘labour reserve’ by the end of 2011, meaning they’ll be on partial pay, with quite a high chance that they’ll be made redundant.

Obviously, that hasn’t proved terribly popular among Greece’s citizens, who claim such harsh austerity measures prevent growth. But the Greek finance ministry is adamant: ‘The final estimate of 8.5% of GDP deficit can be achieved [by the end of 2011] if the state mechanism and citizens respond accordingly,’ it said. We’re sure it’ll be fine – with a record of fiscal rectitude like theirs, what could possibly go wrong?

Obviously, the ones who’ll be keeping their fingers crossed for a positive outcome (apart from Greeks. And Germans. And the IMF. And George Osborne…) will be banks, which have been hit particularly hard by the news. French banks were among the big fallers, with shares in Societe Generale falling by 7%, while BNP Paribas dropped by 6.3%. In Germany, Commerzbank dropped by almost 6%, while Lloyds fell by more than 4%.

Arguably the worst-hit, though, is Dexia: thanks to its above-average exposure to Greek debt, the Franco-Belgian bank could become the first casualty of the impending Greek tragedy. The bank, which is heavily involved in several UK Private Finance Initiative projects, including widening the M25, admitted late last night that it would need major restructuring which would, in all likelihoods, culminate in a hefty bailout. The good (ish) news is that the French and Belgian governments have already said they’ll make sure its account holders and creditors are protected. Although one diplomat has admitted Dexia could be the ‘canary in the coalmine’. Scary stuff.
Economy Misc

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